On June 30, 2013, the Obama Administration introduced “Power Africa”, an inter-agency initiative designed to increase access to electricity across Sub-Saharan Africa. While the program was generally welcomed by industry participants and development professionals, there was some concern at that time whether it would survive beyond the end of President Obama’s second term. Two very recent developments have eliminated any doubts that the initiatives embodied by Power Africa will continue well into the next decade.
Electrify Africa Act
First, on February 8, 2016, President Obama signed into law the Electrify Africa Act of 2015 (the “Act”). Initially passed by the Senate in December 2015 and then adopted by the House of Representatives in early February, the Act marks an important step towards institutionalizing the programs put in place under Power Africa. The purpose of the Act is “to establish a comprehensive United States Government policy to encourage the efforts of countries in Sub-Saharan Africa to develop an appropriate mix of power solutions, including renewable energy, for more broadly distributed electricity access in order to support poverty reduction, promote development outcomes, and drive economic growth, and for other purposes.” More specifically, the Act establishes as the policy of the United States an intention to promote first-time access to power and power services for at least 50,000,000 people in Sub-Saharan Africa by 2020 in both urban and rural areas, and to encourage the installation of 20,000 MW of electric generation by 2020. Importantly, the Act calls for an “all-of-the-above” development strategy that utilizes fossil fuels, hydropower, geothermal and renewable energy sources – acknowledging that Africa’s power needs will not be satisfied by solar panels and wind farms alone.
Under the Act, the President is tasked with establishing a multi-year strategy to “encourage the efforts of countries in Sub-Saharan Africa to implement national power strategies”, to be set forth in a report delivered not later than 180 days following the Act’s enactment. It also requires the President to identify what trade policies can be implemented in support of the Act’s objectives, including a reduction or elimination of import tariffs in African countries applicable to power generation equipment. Finally, the Act encourages certain agencies of the United States Government, including the U.S. Agency for International Development and the Overseas Private Investment Corporation (OPIC), to prioritize power projects in Sub-Saharan Africa over other regions and sectors.1 By 2019, the President is required to submit a report on the progress arising out of the initiatives set forth in the Act.
A Roadmap to Electrification
On a January 28, 2016, the Power Africa partners introduced the “Roadmap”, a well-conceived and detailed plan to achieve two ambitious targets in Sub-Saharan Africa by 2030: (1) to increase installed capacity by 30,000 MW and (2) to create 60 million new connections to electrical grids or other distribution systems. In terms of new generation, the Roadmap outlines an aggressive plan to increase installed capacity, and notably adopts the Act’s all-of-the-above emphasis, encouraging non-renewable generation where there are no viable affordable alternatives. The second objective – creating connections to provide access to electricity – will be achieved through expansions of existing electric grids (both urban and rural) and developing off-grid and smaller scale solutions for more remote population centers.
The foundation of the Power Africa strategy set forth in the Roadmap is to partner with African governments, the private sector, development agencies, multilateral and bilateral financial institutions and non-governmental institutions to promote, stimulate and catalyze the development of power projects – emphasizing that the goal to achieve 30,000 MW by 2030 “starts and ends with energy deals”. To this end, Power Africa has recently partnered with a number of similar foreign or international initiatives, including the Department for International Development’s “Energy Africa” campaign, which is working to increase electrification in Africa through wide deployment of off-grid solar, as well as the International Renewable Energy Agency and the Government of Norway.
Power Africa supports its partners by, among other things, deploying in-country Transaction Advisors to help governments and state-owned utilities structure and negotiate long-term agreements for power projects, including power purchase agreements. Currently, Power Africa has Transaction Advisors supporting 20 countries, but plans to expand. Power Africa also makes available other resources to governments, such as its excellent handbook Understanding Power Purchase Agreements (now available in both English and French), as well as templates for other project agreements.
A significant portion of the Roadmap is focused on how Power Africa will measure and report its progress towards meeting the two primary electrification objectives. New installed capacity and connections will only be counted towards satisfying the targets if the relevant project or initiative which produced such electricity or connections had substantial involvement from Power Africa and/or its key partners. Power Africa intends to publically demonstrate its progress towards its two targets through a detailed tracking tool available at www.usaid.gov/powerafrica or, for those who like to monitor access to electricity in Sub-Saharan Africa on the go, a mobile app.
Two reporting conventions adopted by Power Africa are worthy of some criticism. First, Power Africa intends to count megawatts generated by facilities that change hands due to privatization transactions, including several thousand MW of new gas-fired generation that was recently privatized in Nigeria, towards its target of achieving 30,000 MW. It seems disingenuous to treat such facilities as new generation unless the privatization results in the rehabilitation of a generating facility or some other incremental increase in power generation (and then only the incremental increase in output should be considered). Second, Power Africa intends to use the financial closing of its relevant projects to measure its progress against the 30,000 MW target. Although financial closing may be a convenient milestone for ranking banks and law firms in industry league tables, it seems a premature marker of success for a government initiative designed to ensure access to electricity for the people of Sub-Saharan Africa.
Although Power Africa’s future appears to be secure, some important challenges and shortcomings remain. First, while the Roadmap describes the substantial progress Power Africa has made since 2013, industry publications such as IJ Global who track the development of energy projects have noted that the number of privately developed projects in Sub-Saharan Africa that have reached financial closing has declined over the past two years, and that the investment in the power sector in Sub-Saharan Africa has not increased since 2012.2 One must question whether Power Africa itself is partly to blame.
According to the Roadmap, transactions supported by Power Africa “must meet a set of criteria related to improving the availability, access, or reliability of electric power; be technically and financially sound; align with local government priorities; and meet best practices for environmental and social safeguards, among others.” In addition, the Roadmap indicates that Power Africa is also seeking to reduce gender inequality and promote female participation in the power sector as part of its mandate. While the foregoing criteria and goals are entirely sensible and should be applauded, they do create barriers to financial closing that are not present in other markets, potentially slowing investment decisions and lengthening the project development period. At a time when access to electricity in Sub-Saharan Africa is actually shrinking in percentage terms due to population growth, Power Africa’s ability to accelerate projects towards financial closing is paramount.
Second, the Roadmap underemphasizes the financial impact that its aggressive plan to increase installed capacity will have on national treasuries across the continent. As described in Understanding Power Purchase Agreements, nearly every government-owned offtaker in Sub-Saharan Africa is typically required under its power purchase agreement to acquire the project (at a price to be negotiated) from the private owner when political events affecting the project lead to non-performance by the offtaker or some other default. The Roadmap refers to this obligation as a “financing tool”, noting its utilization in the Azura-Edo gas project in Nigeria. In practice, though, as each new utility-scale generating facility reaches financial closing, the host government must assume, directly or indirectly, a contingent liability of potentially several hundred millions dollars. Governments in other regions have been reluctant or in some cases unable to take on such commitments, leading to the failure of otherwise financeable projects in their countries. As Power Africa marches towards its generation target, it will need to confront this important structural and economic issue.
Finally, Power Africa should devote greater focus to cross-border or regional projects. In other regions, countries have developed a competitive advantage in power generation by developing new projects and exporting electrical energy to their neighbors. Sub-Saharan Africa seems particularly well suited for such projects – e.g., large hydro resources, offshore gas-to-power in East Africa – and has a history of regional projects in the oil and gas sector. Those countries in Sub-Saharan Africa who are keen to take advantage of such opportunities would be incentivized to see projects realized, helping to stimulate foreign investment. Power Africa could play a unique and important role in bringing African governments together to consider and implement such projects and in encouraging multilateral and bilateral financial institutions to support them.